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State treasurer wants to tie reform of PERA to education

The debate over sustaining the state’s Public Employees’ Retirement Association (PERA) system has surfaced again at the legislature, with proposals aimed at addressing an estimated $23 billion in unfunded liabilities.

Republican Treasurer Walker Stapleton has proposed a different approach, encouraging Sen. Michael Johnston, D-Denver, to include PERA reform in any legislation that seeks to raise additional dollars for education. Stapleton wants to ensure that funds are directed into the classroom and not used to backfill unfunded liabilities.

The fiscally conservative treasurer points out that the PERA board has released reports indicating that by 2018, 20.15 percent of the budget for teacher salaries will be directed to PERA.

“I don’t want there to be a bait and switch for voters to think that they’re funding a better, improved public school education system, and to find out that dollars are being diverted to fund an unsustainable retirement system,” Stapleton told an audience of Action 22 members at the Capitol on Wednesday. “That is not fair. I will continue to press that issue, even if I make myself unpopular in the process.”

Stapleton might indeed find himself in an unappealing situation if he speaks out against an initiative to raise money for education. There is bipartisan support for funding education. But Stapleton says voters must be guaranteed that the money they fork over for education is used to benefit schools.

“Before revamping our school funding we owe it to taxpayers, parents and especially our children to take an honest look at how PERA effects school budgets across Colorado,” Stapleton said in a recent statement.

Johnston has been working with the Colorado Children’s Campaign on a possible revenue stream for education. The proposal could come as a package, including both an initiative for voters and legislation addressing the School Finance Act.

Johnston was still not ready to introduce a measure as of Feb. 7, but he has floated several ideas, including adjusting formulas used to calculate school fund-ing. Ultimately, the heart of any legislation would be dependent on voters.

But Johnston said he is not sure that he would include PERA reform as part of the proposal, despite conversations with Stapleton. Johnston is comfortable with the current assumption of an 8 percent rate of return.

“That number looks strong,” said Johnston. “If you look at the four-year average rate of return… it’s around 11 ¼ percent… and the number we’d have to hit to stay solvent is 8 percent. So, even coming out of a recession we’re beating the expectations…”

Johnston also points out that it has only been three years since lawmakers passed Senate Bill 1, which required an increase in the employer and employee contribution rates to PERA, as well as a limit on the annual cost of living increase.

“If you go back and readjust PERA again we just add more to the obligation of districts and employees to meet, and so I think we want to be real cautious to make sure that we’re allowing districts and employees to get used to the new increases in contributions required before we look at new ones,” warned Johnston.

Legislature addresses PERA

But Stapleton does not believe there is time to waste. He feels the legislature needs to reform PERA, or face an insolvent system that could lead to bankruptcies.

“What I want most of all is for the pension system to set realistic objectives for what it can achieve, and then I want the legislature to do its job,” declared Stapleton. “I want Republicans and Democrats to recognize that we have a growing math problem on our hands, and to roll up their sleeves and get to work with solutions to fix it.”

Driving his motivation is a conviction that the 8 percent rate of return assumption is unachievable over the long-term. Stapleton is concerned that Colorado could join states like California, which has faced dismal budgeting because of obligations to state employees.

“We in Colorado are on a trajectory of promising even more than these cities in California, which have had tons of financial difficulty because of the promises they made their public employees,” Stapleton told the Action 22 gathering. “I find that to be an economic fact that to me is troubling.”

Greg Smith, executive director of PERA, disagrees with the treasurer’s opinion. He says the 8 percent assumption is achievable, pointing to a diverse investment portfolio, low investment expenses, longer investment times, professional management, tax advantages and strong historical returns. Smith adds that PERA has seen returns consistently exceeding 8 percent, including 8.5 percent over 25 years and 10 percent over 30 years.

But Smith acknowledged that there is uncertainty with the system: “The PERA board certainly recognizes that reasonable people can differ about what the future holds. Who has the best crystal ball, no one knows at this time. We all know that there are a lot of ups and downs in the future.”

Republican lawmakers sought to address PERA this week at the legislature, sponsoring two bills that were both killed in committee.

Senate Bill 55, sponsored by Sen. Kent Lambert, R-Colorado Springs, would have required the legislature to adjust employer or member contribution rates as necessary to maintain the system. The PERA board would have been required to annually submit re-commendations to the legislature to en-sure full funding. A public financial re-port would have been required as well.

Lambert said the measure is necessary to deal with spikes in the financial market.

“There’s a great deal of uncertainty as to what our investments are going to do,” Lambert told the Senate State, Veterans and Military Affairs Committee, which rejected the measure Monday on a 3-2 party-line vote.

Sen. Ted Harvey, R-Highlands Ranch, is concerned that PERA officials could hide rate of return figures from the public when the economy heads into a downturn.

“Could it be that you’re more confident about talking about it when it’s a positive number, and less confident to talk about it when it’s a negative number?” he asked Smith.

But Smith said SB 55 could lead to arbitrarily lowering rates, suggesting that the information provided by the PERA board on the rate of return is accurate.

“We see no reason to reduce the rate at this point in time. The PERA board has reviewed it with the experts and have gotten their recommendations and have supported and sustained the 8 percent for the next year,” he advised the committee.

Lawmakers on Wednesday then killed House Bill 1040, sponsored by Rep. Kevin Priola, R-Henderson. The measure would have modified how to calculate a PERA member’s benefit amount.

Rather than calculate the amount based on the average of a retiree’s three highest annual salaries — as the system works now — benefit amounts would have been calculated based on a member’s seven highest salaries.

An almost identical measure was killed last year. The House Finance Committee killed the measure again this year on a 7-5 party-line vote.

Priola said his measure would have offered a first step to addressing PERA’s potential insolvency by making more realistic guarantees to state employees in the future.

“Imagine we are running a marathon…” explained Priola. “If you look at the 8 percent as the high-water mark… we’re basically saying as a body that we’re going to run this marathon for 30-plus years, and we’re going to do it at a four-minute mile… That’s nearly world record pace… All it will take is one more major downturn in the coming years.”

But John MacPherson, the former interim executive director of the DPS Retirement System and a member of the Colorado Coalition for Retirement Security, helped convince Democrats that before making changes, current reforms need a chance.

“We must remember that the package of measures which were contained in SB 1… were meant to work over the course of the 30 years since passage of SB 1, and given time, those of us on the coalition who studied these things on a regular basis believe SB 1 will bring all divisions of PERA to sustainability within, or very near to that 30-year timeframe,” said MacPherson.